The sugar industry provides a good example. Farmers supply sugarcane to sugar mills. Sugar mills also produce ethanol and generate power. Ethanol is used by oil companies to blend with petrol to reduce fuel costs. Surplus power generated by sugar mills is sold to the grid. Due to vagaries of nature and dynamics of supply & demand, these stakeholders are affected from time to time. And, the Big Govt. steps in to help.
People (voters) have a sweet tooth & don’t like sugar prices to increase. The govt. fixes sugar price. Farmers (voters) don’t like sugar cane prices to drop. The govt. fixes sugar cane prices. The sugar mills (voters & sources of political funds) don’t like high sugar cane prices and don’t pay farmers when they face losses due to demand/supply dynamics beyond their control. The govt. offers sops to sugar mills to help clear payments to farmers. Nature suddenly becomes generous and offers a big bounty sugar cane harvest. Farmers are saddled with huge stocks. The govt. offers incentives to sugar mills to pick up excess sugar cane stocks & increase ethanol production. Sugar mills need more capex to increase ethanol capacity. Govt. assures oil companies will buy ethanol at good prices to compensate sugar mills for their efforts and investment. Oil companies start resenting higher ethanol prices when fuel prices start falling. People (voters) also want the benefit of lower fuel prices. Ethanol prices start declining. Sugar mills (voters & sources of political funds) are not happy. They stall payments to sugar cane farmers. Farmers (voters) are not happy. Back to square one. The govt. increases sugar cane prices & provides more sops to sugar mills. But govt. cannot commensurately rise price of sugar because people (voters) have a sweet tooth.
Meantime, these interventions cause other distortions. Farmers may increase or decrease land under cultivation depending on their income visibility, which is artificially propped up by the government. Higher sugarcane cultivation needs more water as sugarcane is a water-intensive crop. Other crops are impacted as land is diverted to sugarcane. Lower sugar cane cultivation may reduce supply of sugar and increase prices. Often, bad weather plays spoil sport, complicating the situation further.
Besides producing sugar & ethanol, sugar mills also export surplus power to the grid. To offset the vagaries of the sugar business and also increase power production, the govt. offers sops to sugar mills to co-generate power as additional source of revenue. Sugar mills invest more capex to expand their power generation capacity. The govt. fixes the power tariff at which power distribution companies (discoms) buy power from sugar mills. The discoms work with both hands and legs tied. They have no control over their selling & buying price of power. Discoms cannot increase price of power without incurring the displeasure of the public (voters) and politicians (masters). They run up huge debts and don’t pay the sugar mills. Sugar mills have incurred big capex on power generation and, in turn, don’t pay farmers. Govt. steps in to allay the fears of farmers (voters) & sugar mills (voters & sources of political funds). The fate of discoms & oil companies? They are government-owned and future governments can save them.
And the sweet show goes on.
Not stopping with its success in the sugar industry, the govt. also helps other farmers growing oilseeds, pulses etc. They are promised minimum support prices. The private sector is given sops to buy from farmers and make profits. The vagaries of nature and dynamics of supply & demand will affect these stakeholders (voters & sources of political funds) also. Govt. will step in to fix things & provide incentives, thereby causing other distortions leading to unintended consequences.
Of course, the govt. is at standby to step in again to fix these unintended consequences.
Perhaps the biggest show in town is the government’s antics on fuel prices. We import 80% of our crude oil requirements and have no control on international crude prices. Yet the govt. fixes domestic fuel prices and extracts huge taxes, a big source of govt. funds. Even after the much bandied about deregulation of fuel prices, the govt. indirectly influences fuel prices by changing taxes. The centre & different states succumb to public (voters) and opposition pressures in different ways, thus influencing fuel prices which has wide ramifications across the entire economic system, cutting across all industries. A prime recipe for all kinds of market distortions and unintended consequences.
An alternative is to avoid govt. intervention of all kinds and let the market behave naturally. But our egos won’t let that happen. We have to do something. We can’t sit idle.
And the show continues…